in Bank - 04 Oct, 2019
by Curtis - no comments
National Bank Of Canada Research Suggests That Oil Price Hikes Might Not Be Golden For The Loonie

The recent oil production cuts that were caused by the recent drone attack on a major Saudi Arabia oil operation brought some good news for the Loonie, and the many Currency Exchange businesses that deal with it, as it resulted in an upsurge for the currency, thanks to the CAD’s high correlation to oil prices thanks to the country’s high oil production, which is a key figure in foreign exchange calculations.

The National Bank of Canada decided to do some digging on the matter, and noted that it might not be as big of a boon for the CAD as people hoped.

They point towards a similar incident, the invasion of Kuwait by Iraq back in 1990, which resulted in the latter taking the former’s oil production capabilities offline.

NBC Financial Markets Unit Foreign Exchange Analyst, Sandra Kagango, noted that, in the months following that event, oil prices doubled, but the CAD only appreciated by 1.4% in the 20 days following the event.

Following that, the ‘risk off’ tone that investors embraced escalated led to the Loonie depreciating, which suggests that the price of oil might not be as highly correlated to the CAD’s status in Currency Exchange, particularly during shifts in the market that happen due to geopolitical shocks.

The recent drone attack knocked out half of Saudi Arabia’s oil supply, which accounts to approximately 5% of the world’s total production. Consequently, this resulted in oil prices spiking in markets, some going up by 15%, which has since returned to norm.

The CAD had a clear reaction to the spike prices, which has seen given back all the gains it got since the incident.

The Pound-to-Canadian Dollar exchange rate dropped from pre-attack’s 1.6617, down to 1.6415 on the Monday following the incident, but since went back up to 1.6560.

Meanwhile, the USD-to-CAD exchange rate sits at about the same level, at 1.3284, prior to the attack, at 1.3290, effectively putting the kibosh on any appreciation the CAD might see from oil-prices going up.

Kagango explains that, while the market isn’t exactly sure of what will happen as a result of the attack, data shows that production cuts, even those that last for months, isn’t as bullish for the Loonie as most people think, especially if global tension flares up.